The Reserve Funding Crisis

Across California, HOA communities face a common problem: aging infrastructure, depleted reserves, and the prospect of massive special assessments. This isn't bad luck—it's the predictable result of systematic underfunding.

What is a Reserve Study?

A reserve study is a financial planning tool that:

Inventories all major common area components

Estimates remaining useful life of each component

Projects replacement costs

Calculates funding needed to cover future expenses

California Civil Code §5550 requires associations to conduct reserve studies at least every three years.

The Three Types of Reserve Studies

Level 1: Full Study (On-Site)

Physical inspection of all components

Most accurate and recommended for initial studies

Level 2: Update with Site Visit

Updates previous study with new inspection

Appropriate for 3-year updates

Level 3: Update without Site Visit

Desk review adjusting for inflation and changes

Least accurate, not recommended

Understanding Percent Funded

"Percent funded" compares actual reserves to ideal reserves:

Why Boards Underfund (And Why It's Wrong)

"We'll deal with it when it happens"

This shifts burden to future owners who must pay for deferred maintenance plus emergency premiums.

"Assessments need to stay low"

Artificially low assessments hide true ownership costs and create liability when problems emerge.

"The reserve study is too conservative"

Professional studies use industry-standard lifespans. Assuming components will last longer is wishful thinking.

The Real Cost of Underfunding

Example: Roof Replacement

Current cost: $500,000

Remaining life: 10 years

Annual reserve contribution needed: $50,000

If the association only contributes $20,000/year:

After 10 years: $200,000 in reserves

Shortfall: $300,000

Result: Special assessment of $3,000+ per unit (100-unit building)

Best Practices for Reserve Funding

**Aim for 70%+ funding** - This provides a buffer for unexpected costs

**Update studies every 3 years** - Costs and conditions change

**Use Level 1 studies** for aging infrastructure

**Communicate with owners** - They deserve to understand the community's financial health

**Consider phased assessments** - Gradual increases are easier than sudden spikes

Post-Surfside Reality

Florida's SB 4-D now requires full funding of structural reserves—no more waiving through owner vote. California may follow suit. Boards should prepare for a future where adequate reserves aren't optional.

I've seen communities torn apart by surprise special assessments. The anger isn't really about the money—it's about the years of misleading financial statements that suggested everything was fine. Transparency and proper funding build trust.

Percent Funded	Assessment
70-100%	Strong - well-funded
30-70%	Fair - may need increases
Below 30%	Poor - special assessment risk

HOA Reserve Studies: Why Underfunding Today Creates Crises Tomorrow